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Death bells for Disney?

LOS ANGELES - The collapse of talks between Pixar Animation Studios and The Walt Disney Co. on a new deal pressures both companies to produce hit films at a time of growing competition among computer-animated filmmakers.

Pixar, with a string of computer-animated blockbusters to its credit, including "Monsters, Inc." and the "Toy Story" films, broke off negotiations Thursday to extend its partnership with Disney and said it would seek a more favorable deal with another studio.

"After 10 months of trying to strike a deal with Disney, we're moving on," Pixar chief Steve Jobs (news - web sites) said in a statement. "We've had a great run together — one of the most successful in Hollywood history — and it's a shame that Disney won't be participating in Pixar's future successes."

Shares in Pixar rose $2.78, more than 4 percent, to $66.98 in morning trading on the Nasdaq Stock Market. Disney shares fell 58 cents to $23.87 on the New York Stock Exchange (news - web sites).

Pixar still owes Disney two movies under the current deal, "The Incredibles," which is scheduled to open in theaters in November, and "Cars," which is to be released next year.

The Emeryville, Calif.-based studio, which co-produced last year's top-box office draw, "Finding Nemo," has long chafed under its contract with Disney, which retains the right to make sequels to movies such as "Toy Story" and "Monsters, Inc."

The companies share box-office receipts and licensing revenues.

Disney chief financial officer Thomas Staggs said the company rejected Pixar's "final offer" because it would have cost Disney hundreds of millions of dollars it is entitled to under its existing agreement "while not providing sufficient incremental returns on new collaborations to justify the changes to the existing deal."

A person familiar with the talks said negotiations broke down because Pixar wanted to reclaim the copyrights to the five films it has produced with Disney so far, plus the two left in the deal. Such an accommodation would have presumably revoked Disney's right to make sequels and potentially denied the company millions of dollars in future profits.

Pixar also wanted to pay Disney a flat distribution fee on all future films, including "The Incredibles" and "Cars." Disney was willing to adjust its compensation on the two remaining films, but would not agree to return the copyrights, said the source, speaking on condition of anonymity.

Analysts said that while Disney may have been wise not to agree to a deal at any cost, it now has two years to show it can make successful animated films without Pixar's help.

Disney has had mixed success over the past few years with its animated films, producing such box office disappointments as "Atlantis" and "Treasure Planet" and modest hit like "Lilo & Stitch" and "Brother Bear."

"I think that if Disney can move in that direction successfully, it's not going to be devastating," Janna Sampson, co-Manager of the AmSouth Select Equity Fund and director of Portfolio Management at Oakbrook Investments. "That's the wild card — can Disney get its animation studio to produce the kind of hits Disney used to produce without anybody's help?"

Disney recently closed its Orlando, Fla., animation studio and has pared its staff of animators to 600 from a peak of 2,200 employees in 1999. For the first time in years, it has no traditional hand-drawn films in production.

Disney plans to release its first in-house computer-animated film, "Chicken Little," in 2005, the year its current Pixar deal expires. Disney also is producing other computer-animated films, including "A Day With Wilbur Robinson," to be released in 2006.

On Thursday the company also announced plans for two new computer-animated films, including a long-awaited "Toy Story 3."

For Pixar, the break from Disney will allow it to keep more profit from future films while increasing the risks should those movies underperform.

"The risk is all theirs now," said Peter Mirsky, a financial analyst with Oppenheimer & Co. "They wanted it, they got it. Plus, they've added a competitor in Disney."

While Pixar has had major hits with all five of its films, including "A Bug's Life" and "Toy Story 2," it no longer has the field to itself.

This year alone, DreamWorks is releasing two computer-animated films: "Shrek 2" in May and "Shark Tales" in November. Warner Bros. will release the animated "Polar Express" in November, and Fox's Blue Sky Studios, which made the hit "Ice Age," is planning to release "Robot" next year.

Former Disney board members Roy E. Disney and Stanley Gold — who have been urging the company's chief executive, Michael Eisner, to step down — expressed concern when they quit the board last year that Disney was not properly managing its relationships with Pixar, Miramax and other companies.

In a statement Thursday, they blamed Eisner for the Pixar breakdown.

"While we expect that the tail of the relationship will continue to provide short-term earnings gains, the loss of this relationship, we believe, will result in the loss of long-term value for the company and its shareholders," the men said.

Analysts doubted the failure to reach a deal with Pixar would jeopardize Eisner's job.

"Roy's goal is to see Eisner out," Sampson said. "That doesn't make Eisner's job easier in the next couple of days as he tries to calm the concerns. But things are on the improvement side for Disney, and if that continues, I find it unlikely we'll see Eisner out of a job."

One certainty is that Pixar will have no problem cutting a more favorable deal with a new studio.

Thursday, Warner Bros., Fox and Sony all expressed interest in talking to Pixar. Fox distributes producer George Lucas (news)'s "Star Wars" films for a flat fee — terms similar to those Pixar wants.

Okay, so first they put out a few truly great movies that break from their usual mold (Dinosaur, The Emperor's New Groove, and Atlantis) and underpromote them until they bomb miserably. Then, based on those and the (justified) failure of Treasure Planet, they can their entire 2D studio in the midst of the release hoopla for Brother Bear (and following Lilo & Stitch). No last ditch effort (though Home on the Range is already ready for release, and I doubt it'll smash box office records). Now they not only lose the group responsible for all their CG success, but they have to compete against them? (Oh, and they have to compete with a new studio, the name of which escapes me, which can start all their trailers with "From the creators of Mulan and Lilo & Stitch.")

Suicide. Despite what the analysts quoted in this article said, Eisner's job is up. And hopefully whoever takes over will be able to clean up the mess.

This is great news. Disney is the Wal-Mart of movie studios/entertainment except that they have jacked up prices. Biggest tightwads in the bizz. I'd love to see them get rid of that punk Eisner and finally sell of their SoCal sports franchises to some decent people willing to shell out some $ to get them improved. Maybe a good swift kick in the A, like this happening, will turn that behemoth around.

"I'm just a YES man trying to make my way in the universe." - Jango McCallum

"Good dialogue and smooth editing are no match for a good YES man by your side, kid." - George Lucas

I think it's funny that Disney and other studios out there see Pixar as basically just a CG house, as if that magic in the Pixar films somehow intangibly flowed from Eisner's crew instead of directly from the many creative minds at Pixar. Monsters Inc isn't a great film because the Disney logo at the beginning, it's because of the unique top-notch artwork and solid heartfelt and imaginative writing. By not realizing this, I think Disney is proving its true colors - it's not about the ideals of making something special anymore, it's about brainless corporate mentality. Of course, one look at Disney's California Adventure should be able to tell us that.

Darth Vader is becoming the Mickey Mouse of Star Wars.

Kylo Ren - came from Space Brooklyn, although he moved to Space Williamsburg before it was trendy.

The use of a lightsaber does not make one a Jedi, it is the ability to not use it.

I havent liked a Disney animated movie since Aladdin(sp?). They Pixar movies are great and I hope this bites them on the rump. Eisner should be axed and get someone inthere who knows what they are doing.

I think it's pretty safe to say that the next 5 Pixar movies will take home close to double what the next 5 Disney animated projects will (CG included, as they'll likely go that way). They'll regret this decision.

The only thing Disney is good for is their theme parks, but some of that sucks too (most of Epcot, ALL of Animal Kingdom). Disney was great for what, 90 years? But maybe it's time for them to just stop trying. All of their recent movies weren't anything like the old ones, and most of them really tanked. Pixar rocks, hopefully they can still do more stuff for a while.

MC - The analogy of WM and Disney was great! One thing I always hated about Disney is when they had a new animated movie come out A New Instant Classic! I'm sorry, but can you say The Hunchback Of Notre Dame?

The folks at Pixar did an excellent job of bringing those characters to life, and it was a team effort from the voice actor to the lowliest animator.

"Instant Classic" .... there's a term I've not heard in a looong time... a LONG time.

Right, I HATES DISNEY..... just had to preface with that, sorry....

The analogy is pretty apt, especially the way Disney is totally the opposite of what many folks believe... it drives me nuts the way folks imagine that there are good lessons in Disney films.... they are some of the most racist, classist, sexist , divisive brainwashing tools I've ever had the displeasure of experiencing....

I'm hoping that their demise is painful, the company has been smiling while it twists the knife for far too long.... every sweatshop mickey t-shirt will weep copyrighted tears of dollars....

Right, sorry, I don't like animated films, I guess

An I hated Disney for buying the RCMP's image, too, that just seems wrong (correct me if that's just a crafty urban myth,JJ, I know ya want to)

Good, I hope they fail miserably. I've never liked Disney or their goofy cartoons. Lion King, Beauty and the Beast, to hell with all of their "classics."
I've embraced some of the new CG animation over the past few years. I love Ice Age,
Monsters, Inc., Shrek, and a few others. I couldn't care less about Disney and what they do . . . I've always associated Monsters with Pixar anyway.